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A two-stage general approach to aggregate multiple bank risks

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  • Zhu, Xiaoqian
  • Wei, Lu
  • Li, Jianping

Abstract

There are many types of bank risks and their basic characteristics vary greatly differently, therefore, how to effectively aggregate three or more risks is still a great challenge. This paper proposes a novel two-stage bank risk aggregation approach to solve this problem. The risks are firstly divided based on whether they have common factors or not, then the top-down approach and bottom-up approach are reasonably combined to aggregate them. It is applied to aggregate credit, market and operational risks of the Chinese banking industry. The comparison with other popular approaches shows that this approach leads to much larger diversification benefits.

Suggested Citation

  • Zhu, Xiaoqian & Wei, Lu & Li, Jianping, 2021. "A two-stage general approach to aggregate multiple bank risks," Finance Research Letters, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:finlet:v:40:y:2021:i:c:s154461232030533x
    DOI: 10.1016/j.frl.2020.101688
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    More about this item

    Keywords

    Risk management; Bank risk; Risk aggregation; Risk factor; Hierarchical copula;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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